In a speech in August 1999, Mr. Greenspan said: We no longer have the luxury to
ID: 1111605 • Letter: I
Question
In a speech in August 1999, Mr. Greenspan said:
We no longer have the luxury to look primarily to the flow of goods and services, as conventionally estimated, when evaluation the macroeconomic environment in which monetary policy must function. There are import but extremely difficult questions surrounding the behavior of asset prices and the implications of this behavior for the decisions of households and businesses.
The asset price that Mr. Greenspan was referring to was the US stock market, which had been rising sharply in the weeks and month spreceding this speech. Inflation adn unemployement were both low at that time. What issues concernign the conduct of monetary policy was MR. Greenspan raising?
Explanation / Answer
In the current scenario, Mr. Greenspan was referring that the Fed cannot follow Quantitative Easing policy as the economy is operating near its potential level. Any increase in the money supply in this scenario will increase the asset prices further and this might lead to another bubble in the economy. Fed should focus on tightening the monetray policy now.